Loan default rates on the rise

The number of borrowers defaulting on federal student loans has jumped sharply, the latest indication that rising college tuition costs, low graduation rates and poor job prospects are getting more and more students over their heads in debt.

The national two-year cohort default rate rose to 8.8 percent last year, from seven percent in fiscal 2008, according to figures released Sept. 12 by the Department of Education.

These numbers include only subsidized and unsubsidized Stafford student loans.

Of the approximately 1 million student borrowers at for-profit schools whose first payments came due in the year starting Oct. 1, 2008 at the peak of the financial crisis 15 percent were already at least 270 days behind in their payments two years later. That was an increase from 11.6 percent among those whose first payments came due the previous year.

At public institutions, the default rate increased from 6 percent to 7.2 percent and from 4 percent to 4.6 percent among students at private not-for-profit colleges.

“Part of it is the economy,” said Dyane Foltz, assistant director in Student Financial Assistance. “Really, I think that’s the biggest thing.”

Foltz said graduates are having a harding time finding a job and when they do, its often not in their field or not starting at the salary they’re used to having.

If a university’s default rate goes too high for three years, it risks losing the ability to disburse federal student loans.

Northern Kentucky University’s default rate for the fiscal year 2009 cohort was 7.2 percent, below the national average of 8.8 percent, Foltz said.

Overall, 3.6 million borrowers entered repayment in fiscal 2009; more than 320,000 had already defaulted last fall, an increase of 80,000 over the previous year.

The federal default rate remains substantially below its peak of more than 20 percent in the early 1990s, before a series of reforms in government lending. But after years of steady declines it has now risen four straight years to its highest rate since 1997 and is nearly double its trough of 4.6 percent in 2005.

Troubling as the new figures are, they understate how many students will eventually default. Last year’s two-year default rate increased to more than 12 percent when the government made preliminary calculations of how many defaulted within three years. Beginning next year, the department will begin using the figure for how many default within three years to determine which institutions will lose eligibility to enroll students receiving government financial aid.

The figures come as a stalled economy is hitting student borrowers from two sides: forcing cash-strapped state institutions to raise tuition and making it harder for graduates to find jobs. The unemployment rate of 4.3 percent for college graduates remains substantially lower than for those without a degree. But many student borrowers do nor finish the degree they borrow to pay for.

The Department of Education has begun an income-based repayment plan that caps federal loan payments at 15 percent of discretionary income. And new regulations the Obama administration has imposed on the for-profit sector have prompted those so-called proprietary colleges to close failing programs and tighten enrollment. Both developments could help lower default rates in the future.

The department emphasized that it eventually manages to collect most of the money it is owed, even from defaulters. But that is part of the reason federal student loan defaults are so hard on borrowers ΓÇö they can’t be discharged in bankruptcy. Defaulting can also wreck students’ credit and hinder their ability to return to school later with federal aid.

“There are very few avenues for escaping that,” Cochrane said. Also, “many employers these days are starting to check credit, so it can hurt your job prospects.”

Cassie Stone contributed to this report.